Wednesday, February 08, 2006

Will Pepsi Fizz or Fumble?

Soft drink/packaged foods giant Pepsi (PEP) reports 4Q results later today.

The Street's looking for .65 cents per share on sales of $9.6 billion for the quarter.

As everyone knows by now, Pepsi is kicking some serious butt. sums it up quite nicely:

Unlike Coca-Cola (KO), which has just recently realized that manufacturing carbonated soft drinks (CSDs) is a declining business, Pepsi has successfully diversified away from CSDs into snacks, such as Frito Lay, and other faster-growing beverage categories such as bottled water and sports drinks. The difference in financial results has been staggering. Over the last five years, Coca-Cola has managed to eke out an average annual earnings-growth rate of just over 5%. Pepsi, meanwhile, has grown earnings at a relatively blistering pace of over 12%....

Now we know why Quiznos Sub signed a deal with Pepsi in which the former will supply beverages to 3,200 U.S. sandwich shops, which had previously sold Coca-Cola products for 2 decades.

On Wednesday's call, we'll be looking for Pepsi to give us some color on the energy drink boom and what ramifications it has had on Pepsi's soda segment. One should also watch for what effect, if any, higher energy costs have had on the Frito Lay division, which accounts for 60% of PEP's sales.

We expect PepsiCo to deliver a solid quarter buttressed by robust beverage volume. We rate Pepsi a strong buy because of the company's broad revenue profile, enviable international footprint, and potential for margin expansion vis-a-vis cost containment.

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